South Korea’s balancing act between AI boom and energy-driven challenges
South Korea’s economy is driven by a 40% year-on-year surge in exports, led by semiconductors, computing equipment, and petroleum products, despite Middle East conflict risks, while rising energy prices and producer inflation at 6.9% strain domestic costs and consumer prices. Strong demand for chips and elevated oil prices above $90 per barrel are expected to sustain export growth and corporate earnings, though domestic inflation pressures persist due to input cost hikes in chemicals and metals.
South Korea’s economy is navigating a dual challenge: rapid AI-driven export growth and rising energy costs. Exports surged nearly 40% year-on-year in the first quarter, with semiconductors (202.1%), computing equipment (305.5%), and petroleum products (46.3%) leading gains, while auto exports declined by 10.1%. Early May data showed a 64.8% year-on-year export increase, signaling sustained momentum, though imports also rose sharply, particularly in energy (23.9%) and petroleum products (58.6%). Semiconductors are projected to account for 40% of total exports in 2026, reinforcing their dominance. Strong price effects are boosting exports, especially in semiconductors and oils, as demand outpaces supply. Major chipmakers report filled 2027 order books, keeping prices elevated, while oil prices are expected to remain above $90 per barrel by year-end due to production disruptions and restocking demand. This has improved South Korea’s terms of trade, with export prices rising faster than import prices in March and April, supporting corporate earnings and investment. Domestic inflation pressures are mounting, however. Producer prices increased 6.9% year-on-year in April, driven by petroleum, chemicals, and basic metals. While the government has capped gasoline prices and extended a fuel tax cut until July, broader cost increases threaten consumer prices. Power rates are expected to remain stable due to increased nuclear and coal generation, but sustained input cost hikes could offset these measures. Despite uncertainties from the Middle East conflict, South Korean businesses are increasing capital expenditure, with machinery and chip-making equipment imports rising by 11.9% and 116.2%, respectively. This suggests confidence in long-term growth, though energy trade volumes are expected to slow in the second quarter, moderating overall export and import growth. Net exports are still projected to contribute positively to GDP growth in 2026, but policymakers face challenges balancing export-driven expansion with rising domestic costs.
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